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Tuesday, 31 March 2015

I think every Malaysian will more or less buy more things before GST, either fast moving groceries or things we seldom buy. I'm also one of them.

Actually I did not buy a lot of extra items, but it's enough to explode my credit card...

Some people may want to buy 100 rolls of toilet papers, some change their furniture or home appliances, some do house renovation and some buy a new property.

For me, I just stock in more infant milk powder, only to realize later that they are exempted from GST...

Anyway, GST has hastened me to purchase 2 Redmi Note 4G, one for my wife and one for myself. This is the first time in my life that I shop for a smartphone!

Extra 6% might not seem to be a huge amount in which consumers pay extra 60 cents for a RM10 item.

However, when you are charged 6% on almost everything in your life, that is a significant financial burden.

Before its official date of implementation, most people are already being charged GST.

I have two, motor insurance and life insurance, which have already been paid.

I can foresee tighter cash flow this year, especially when my take-home pay will be 30% lower than previous year. This is a real challenge for me and I really need to be more frugal after this.

To cut down expenses, it's always good to look at those fixed and recurring expenses first.

My first move is to downgrade my Astro subscription, which will save RM30 per month.

I like sports, and I like to watch EPL football matches which I started to do so some 25 years ago.

Now I have removed full Astro Sports package but I still have some sports channels in HD. So why not?

My next target will be phone bill. I consistently pay more than RM200 per month to Maxis even though I normally use only about RM30 a month.

This is because I have to pay for 4 supplementary lines which include a few heavy users. I have tried to find ways to reduce this bill since few years ago but the conclusion is always more worth it to keep current package.

With new smartphones for myself and my wife, I'm considering to subscribe for data service so I really need to work it out smartly.

For home internet, I think I have saved quite a lot for 2-3 years since moving into my new house, by not subscribing to Streamyx or Unifi.

Now I'm using 4GB of WiFi data volume a month (RM68) at home and it appears just enough for me.

I purposely limit my online time at home to spare out more time for family and house chores. In other words, I have not much time and MB to do stock market research at home.

For electricity bill, I think there's not much room to save significantly except I don't use air-conditioner all together. My average usage is approximately RM140 per month.

Previously I used to turn on the air-cond at night for 3 hours at 27-28C. However, since last year when the weather is very hot, the air-cond is turned on for 6-8 hours! Now I should cut down the time again...

Though these cost-cutting measures may not save a lot, I think it's still good to make it a habit to control our budget.

Time flies. I remember when GST was announced by the government officially during Budget 2014 in Oct 2013, I felt that it's still a long time to go. Now the time has finally arrived.

As almost all countries around the world adopt GST, I believe that it is an essential tax system which can benefit the country. I just hope that government will utilize the tax income smartly.

Thursday, 26 March 2015

It's too bad I just get to know that Scientex has "Investor Presentation" in its website since Dec14.

No wonder I can't find information about its property sales and unbilled sales in its financial notes submitted to Bursa Malaysia anymore.

I'll just paste a few useful slides here for my reference.

Consumer packaging is currently driving its manufacturing growth. It has a RM300mil capex plan from 2014 to 2016 to increase the production capacity for PE, CPP & BOPP films. The capacity of its consumer packaging division will increase by 140% from 5,000MT/month to 12,000MT/month in 2017.

The construction of new CPP film plant has just started in Jan15 and is on track to be completed in Jun15. Commercial production is expected to start by end-2015.

The new BOPP film plant, which has just commenced its construction in Feb15, is expected to start commercial production in mid-2016.

The management anticipates good demand for its BOPP films as majority of BOPP films used in Malaysia are imported at the moment.

For its property segment, it has current projects worth RM1.5bil, with another RM4.0bil worth of GDV in the pipeline.

It has launched 6 new projects worth RM276.1mil in 1H15 but manage to achieve sales of RM397mil in the same period. Unbilled sales reach RM640mil now, slightly higher than RM631mil last quarter.

It will launch 1,420 units of affordable houses in Pasir Gudang in April 2015 under Johor Affordable Housing Scheme.

I think this kind of project should be able to generate better sales. If average price is RM400k per unit, then it is a potential RM568mil sales.

Is the RM400k price tag too low for "affordable" houses in Pasir Gudang?

Manufacturing segment's growth is slow or minimal for the past one year, dampened by forex loss. However, the exciting part is from 2016 onward.

Property segment continues its impressive growth with probably some pre-GST shopping effect. It's a good sign that unbilled sales continue to move upward.

As mentioned in previous post, Scientex management team has reduced its USD exposure quite significantly in year 2015. I think they have done a good job.

Scientex has a minimum dividend policy of 30%. It paid 31.7% in FY14 with a decent DY of 3.2%. It has a EV/EBITA of 7.6x.

For complete slides of Scientex's investor presentation, please go to its website.

At a glance, Scientex's FY15Q2's revenue and PATAMI are better both QoQ and YoY. So that's good enough.

Scientex has a huge percentage of its bank borrowings (77% or RM280mil) denominated in USD at the end of FY15Q1. In current quarter, it has dropped to (58% or RM210mil).

Inevitably, Scientex has to recognize a RM9.7mil foreign exchange loss (RM9.2mil realized loss) in Q2 due to weakening of RM against USD.

If this amount is added back to the PBT, then the PBT of RM57mil is actually its record high.

To recap, Scientex registered RM5.2mil forex loss in the preceding quarter of FY15Q1. So total forex loss in the first half of FY15 is RM15mil.

It has forex gain of RM4.4mil in FY14Q4.

I think the worse should be over even though US seems reluctant to raise its interest rate early. Ringgit might still break its recent low against USD but it might not be as severe as the last few months.

Moreover, I'm pretty sure that Scientex management will continue their effort to reduce its exposure to USD debts.

In FY15Q2, revenue from both manufacturing and property segment hit record high while their operating profits show significant improvement compared to previous quarter of FY15Q1.

FY15 6 months PATAMI of RM66.3mil is slightly higher than RM63.3mil in the corresponding period of FY14 despite the huge forex loss in FY15.

New property sales so far in 1HFY15 stands at RM397mil, which represents 84% of the total revenue of its property division in the last 4 quarters added together (RM474mil), which I think is great.

Total property sales in the whole FY14 was RM470mil.

There is no info regarding the latest unbilled sales. Its unbilled sales in the end of FY14Q4 was RM537mil. Current unbilled sales should be at least RM650mil I guess.

For its manufacturing division, it's all the old stories again. Its CPP film expansion is on track to be completed by the end of CY2015 while its new BOPP film plant should be ready by second half of CY2016.

Overall, I'm quite surprise by its property sales achievement in 1H15 (provided that the figures given by Kenanga is correct). It will give me more confidence to continue my investment in Scientex.

Monday, 23 March 2015

"Buying shares in a company is like doing the business with the company". This is what I try to practice in stock market investment in the last 2-3 years.

Any business needs time to bear fruits, so I believe that I need to hold for longer term.

Even though I have rather good "results" from speculating in stock market in the past, I have told myself not to do this again, as advised by Buffett & Cold Eye.

I think I will make money rather than lose money if I continue to speculate in the last 2 years while the stock market is in its uptrend, because most of the stocks that I'm keen to speculate on went up in share price.

Nevertheless, I manage to resist myself from speculating, even though there are a few occasions which I nearly do so.

If I continue to speculate in the past 2 years, may be I will earn less by owning less shares in Latitude, or may be I will earn more by selling Tambun earlier above RM2.40 to take more cash. So it's hard to know whether I'm better off by not speculating in stock market.

It seems like it's easy to earn money in stock market. You just need to follow the theme.

What are the hot stocks at the moment? Technology, furniture, poultry, export-orientated etc. If you have your portfolio laden with these stocks, then you are surely doing extremely well.

Are you going to invest in property, oil & gas, plantation, finance etc at this time? It doesn't mean that you will certainly lose money in these stocks. They just need more time and patience perhaps. Remember being a "contrarian" as advised by Buffett & Cold Eye?

To be successful in stock market investment, apart from luck and homework, I think that business acumen or foresight is very important.

Investment in a stock is exactly investing in the company's business. Thus we normally consider a company's:

past records (how was the performance of its business & management team)

future prospect (the demand of its products or services in the future)

stock price (is it worth to pay that kind of price to be part of the business)

To check a company's past record and to determine its value are not that hard actually. The most difficult and important thing is to predict the company's future prospect.

Most famous and successful investors certainly have this either "gifted" or "acquired" business "sixth sense" or acumen. They will see the business opportunity earlier that other people.

When I first started investing in stock market, past financial records are the most important thing to me. I believe that if the company is doing well in the past, it should have a good enough management team to do well in the future.

As I gain more exposure to stock market, I find that future prospect is the most critical aspect which can "overwrite" past record and stock price (current value).

If you follow this blog long enough, you should have known that I have "Four Heavenly King" that made me lost a lot of money.

Just look at KNM's revenue and net profit from 2003 to 2008. Isn't the past records magnificent? It has billions worth of contracts on hand as well!

I didn't look too much into its balance sheet, cash flow or general market sentiment. I bought its shares just before its revenue and profit fell. So I got trapped.

The others are Notion & Masterskill which produced great earning reports too before they collapse.

Notion was doing fine until the emergence of tablets and smartphones which seriously eroded the demand of its hard disc drive and camera parts. If my business foresight was good enough, then I would not put my money into it.

The old MEGB's management was not good enough I think. They was slow to react when PTPTN loan was reduced and nursing course requirement was raised. Why was it suffering while its direct competitor Mahsa seems to do so well?

It's hard to explain why I didn't add stocks like Hevea, Homeritz, Pohuat, Mitra, Prolexus, Magni, Teoseng, LTKM, VS, Vitrox, MPI, Unisem etc into my portfolio, even though they are under my radar and I know these are good stocks with good potential.

Instead, I chose to buy stocks like HHGroup and Johotin which are not following the "theme play" at all.

Perhaps I have a tendency inside me to buy stocks which are not "hot" and are relatively unknown.

When I started to invest in Inari, Latitude and Tambun which are my best investment so far, they are all relatively unknown.

Anyway, business acumen is very important, but I don't mean that I possess good business sense. I still made a lot of bad decision until today.

Bad decision does not only mean buying the wrong stocks, but also missing the good opportunity.

Many of us do not grow up in an environment that gives us this skill. So, no choice, we have to read more, try more, and fail more in order to make more correct decision.

Personally I think it is a better deal compared to Huayang who recently acquired 2 pieces of land in BM town center at RM66 psf & RM103 psf respectively.

I believe that the next phase of development here will be Bukit Kecil area between Tambun Indah's BM Residence and Bukit Residence. Sooner or later a new road will be built to connect Keow Kuang primary school there and Jalan Song Ban Kheng. We should see who owns the land and which developers can acquire them.

Possible Tambun's land on the right

I think this is a very positive move by Tambun Indah. The location of land is good and the price is reasonable. The only problem is squatters, and also relatively low-lying land. Hopefully both parties can come out with a good solution as soon as possible.

The land acquisition is expected to be completed in the second quarter of this year. Tambun usually will launch its development project very fast perhaps by year end or early next year if squatters issue can be settled early.

There is still no information available regarding the detail of development and its GDV. Base on current trend, it is likely that Tambun will develop it into high-end gated guarded project featuring at least 3-storey terrace, semi-Ds, bungalows, condominium and may be townhouses.

Selling price for 3-storey terrace will be above RM700k while condo will be at least RM300 psf.

If you look at Johotin's latest FY14Q4 result, its revenue, PBT & PATAMI are better compared to both QoQ and YoY.

Comparison to QoQ is not that meaningful as investors know that FY14Q3 result was affected by the spillover of compensation paid as a result of quality issue in FY14Q2.

Compared to previous year corresponding quarter of FY13Q4, total revenue in FY14Q4 increases by a magnificent 62%, while both PBT and PATAMI also rise by a commendable 35% and 33% respectively.

Gross margin of FY14Q4 fell 1% point from 16.3% to 15.3% YoY which is not too bad right?

Is it not a good result?

JOHOTIN (RM mil)

FY14

FY13

FY12

FY11

FY10

Revenue

315.5

241.4

246.4

134.2

95.6

Revenue growth %

30.7

-2.0

83.6

38.6

-10.9

Gross Profit

46.8

50.9

47.6

27.5

19.4

Gross %

14.8

21.1

19.3

20.5

20.3

PBT

17.7

27.1

27.6

14.4

8.6

PBT%

-34.7

11.2

11.2

11.0

9.0

PATAMI

13.0

20.6

22.9

11.0

6.3

PATAMI growth %

-36.9

-10.0

108.2

74.6

26.0

EPS

13.91

22.07

30.86

16.56

9.51

NTA

1.94

1.82

1.67

1.52

1.43

ROE

7.2

12.1

14.7

10.4

6.6

Overall in FY14, revenue grows 30.7% from FY13 but PATAMI drops 36.9%. As a result, ROE drops to only 7.2%.

Gross profit margin drops quite significantly from around 20% in previous years to 15% in FY14.

Tin manufacturing is a mature industry though I think it is still not a sunset business yet. So I can't expect too much growth from this segment.

The attention is on its Food & Beverages segment.

For the last 2 quarters, I'm not sure why Johotin's revenue in F&B segment suddenly shot up so much. Its FY14Q4 revenue in F&B has surged 76% YoY. The problem is, PBT in the same period drops 37% from RM4.8mil to RM3.0mil!

The reason given by management is" unrealized foreign exchange loss arise from the outstanding balances owing to suppliers at the current year quarter".

Johotin registered a foreign exchange loss of RM1.683mil in FY14Q4, compared to a gain of RM0.15mil in the corresponding period last year.

If we add in the forex loss, PBT from F&B segment in FY14Q4 & FY13Q4 are almost the same (~RM4.7mil vs ~RM4.7mil), despite the surge in revenue in FY14. So this set of result, probably contributed by higher admin and distribution expenses, is certainly NOT good enough.

In summary, Johotin's overall FY14Q4 profit is unexpectedly "saved" by its old tin manufacturing segment which has more demand at this time.

Johotin makes plastic container as well

Johotin's inventory level increases at an alarming rate in FY14Q4. Of course we would expect higher sales to contribute to higher inventories, but its inventories increase by 114% YoY while its revenue increases by 62%.

This is the main reason that contributes to its poor cash flow I guess, and thus the rise in its short term borrowing which pushes up its net D/E ratio to 0.24x from net cash position a year ago.

What are these inventories? Are they mainly raw material or finished products?

The management stock in more raw materials because of low milk price? Or it manufactures more products because of anticipated higher sales? These inventories are perishable...

I try to search for milk price and this is what I found.

I'm not sure whether this chart for class III milk can apply to Johotin's milk. Its management said that milk price actually increased in year 2013 due to New Zealand drought but this is not the case shown in this chart.

Anyway, we can see that Class III milk price drops drastically since the end of 2014. How will it affect Johotin in 2015? Lower selling price, higher margin, or nothing related at all?

I think this chart is more related to Johotin as it shows the rise in milk price in year 2013.

Milk powder price has dropped gradually as much as 50% since early 2014 and reached bottom in the end of 2014.

Did Johotin stock in more milk powder to take advantage of this situation since its milk powder retail packaging facility is going to be completed soon?

#####

As mentioned in earlier post, I expect Johotin to be an "at-least-RM20mil-annual-PATAMI" company.

If not because of the approximately RM8mil compensation paid, Johotin can achieve close to this target in FY14.

With new venture into milk powder packaging business, there is still room to grow in my opinion.

Able Food brands

Johotin's closest competitor is undoubtedly CanOne. I like Canone for its small fish ate big fish story. However, it might be too full at the moment to move forward.

According to Canone's website, it started to venture into F&B segment in 2006 as an OEM of sweetened condensed milk. Evaporated milk production was started in 2009 and then it has first commercial run of sterilized/flavour milk products in 2014.

I don't study Canone in detail and it seems like Canone is not involved with milk powder.

Both companies have factories in Telok Panglima Garang Selangor, both produce almost the same thing, and both also export their milk products mainly to Africa, Middle Ease & SEA etc.

So it's interesting to compare both of them.

RM mil

Johotin

Canone

FY14 Revenue

315.5

898.9

FY14 Gross %

14.8

11.8

FY14Q4 Gross %

15.3

14.6

FY14 F&B Revenue %

72

63

Market Cap

140

396

Net D/E

0.24

0.81

ROAvgE

7.4

12.4

EPS (sen)

13.91

41.85

NTA (RM)

1.94

3.42

Share Price (RM)

1.50

2.60

PE ratio

10.8

6.2

PB ratio

0.77

0.76

FY13 DPO%

9

11

As Canone has significant profit contribution from its associate Kian Joo, I will not compare their PBT/PATAMI.

While I am complaining that Johotin's gross margin has dropped in FY14, it is actually still higher than Canone (14.8% vs 11.8%).

Johotin's whole year gross profit is negatively affected by quality issue but I'm not sure of Canone's situation.

Johotin's F&B revenue contribution in FY14 (72%) is not much more than Canone (63%).

Canone's ROE is good but its net D/E ratio is quite high, and it is trading at a very low actual PE of just 6.2x!

Both companies are pathetic in dividend payout for their FY13 and their PB ratio are almost the same now.

Able Dairies' customers

As world's population is growing, demand for food will also grow, especially in third world countries where Johotin & Canone export their milk products to.

This seems like a low entry barrier business and thus competition should be intense.

I like the fact that Johotin moves into milk powder packaging business in which it imports them from New Zealand and Australia, packs them in Malaysia and then exports to other countries. The milk powder caters for all age groups from infant, children to adults.

Johotin's new factory for retail packaging of milk powder is expected to be ready in Apr-Jun 2015 but as we all know, delay is common.

I'm eager to see how it will contribute to Johotin's top & bottom lines.

My target price for Johotin will be set at RM20mil annual PATAMI. With outstanding shares of 93.3mil, expected FY15 EPS will be 21.4sen.

So currently it is trading at projected FY15 PE of 7.0x at RM1.50. I will give it a conservative PE of 8x so my target price will be RM1.71.

I just can't be too optimistic with Johotin at the moment as it currently has problems such as tight cash flow, shrinking margin and a bad record of poor quality issue.

As for the case of EPS dilution due to warrants conversion, I might just forget about it as its conversion price is as high as RM2.28.

I hope that in the future it can trade at half of Dutch Lady or Nestle's PE ratio.